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There’s been a sharp upward move in European and US stock indices following Sunday’s first round vote in the French presidential election. Initially this appeared to be the unwinding of certain hedges together with an unleashing of “animal spirits”. These had been supressed by concerns that the two Eurosceptic candidates, Marine Le Pen and Jean-Luc Melenchon, could face each other in the deciding head-to-head vote on 7th May. That didn’t happen, so even though Marine Le Pen is still in with a chance of clinching the presidency, markets are reacting positively to the fact that she now faces a far more pro-business and Europhile candidate in Emmanuel Macron than Melenchon would have proved to be. Not only that, but Macron has a substantial lead over her in the polls. Yet investor reaction has propelled France’s CAC40 to levels last seen in early 2008, just as the financial crisis was beginning to hit. So it’s not as if French stocks are just making back ground lost prior to the vote, which was minimal anyway. Also, while there were some concerns about a Le Pen/Melenchon face-off in the final round, this was far from being the expected outcome. In fact, just about every poll had Macron in the lead with Le Pen a close second which was precisely the outcome.

If we look at US indices, yesterday the NASDAQ100 closed out at afresh record all-time high and soon after today’s open the NASDAQ Composite broke above 6,000 for the first time ever. Meanwhile, both the Dow and the S&P500 are less than 0.5% away from their respective all-time record highs hit at the beginning of March. Bear in mind that this was when President Trump addressed Congress for the first time, giving what was widely considered to be an uplifting, conciliatory, unifying and bullish speech. Yet since then we’ve seen a sharp deterioration in international relations triggered in part by the US missile attack on a Syrian airbase. Not only did this escalate tensions across the Middle East and with Assad-backing Russia, but it also brought relations with North Korea and China into sharp relief. Meanwhile we’ve had another rate hike from the Federal Reserve, while the probability of another 25 basis point increase in June has just spiked up to 60%. Yet just three weeks ago US equities slumped following the release of minutes from the Fed’s March meeting. A number of Fed members expressed the view that equities looked expensive by some valuation measures. But perhaps more crucially, the US central bank indicated it was prepared to start winding down its $4.5 trillion balance sheet before the year-end. All this comes as there’s evidence from both the hard and soft data that US economic growth may be slowing down. That certainly seems to be the message from the US Treasury market where yields on the 10-year dropped below 2.20% this time last week after topping 2.60% straight after the Fed’s rate hike in mid-March. While yields shot higher yesterday, they are currently holding around the crucial 2.30% level. We’ll know more after we see the Advance first quarter GDP number this Friday.

Yet the earnings season has picked up a gear this week and there have been a number of upside surprises. Just today we’ve had significant earnings and revenue beats from Caterpillar, DuPont, 3M and McDonald’s and these have gone a long way from offsetting some disappointing number (notably from Goldman Sachs) last week.

Meanwhile, the Trump administration approaches its first 100 days and has just slapped tariffs on Canadian lumber. On top of this President Trump is still looking to reform healthcare and push tax cuts through Congress, with updates due this week. Meanwhile, in an unusual move Trump has summoned the entire Senate to a White House meeting on North Korea tomorrow afternoon. The president has made it clear that he finds the current situation vis-à-vis North Korea “unacceptable”. But in the meantime investors are making hay while the sun shines.

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